Rail Technology Investments And International Diversification Will Drive Success

Key Takeaways

• Tracsis seeks to grow recurring software and transactional revenues, especially in Rail Technology, for future growth.
  
• Strategic acquisitions and R&D investments aim to expand market reach and improve productivity, potentially enhancing earnings and margins.
  
• Funding shortfalls, cyberattacks, inflation, and procurement delays have adversely impacted Tracsis' revenue, margins, and growth prospects in the rail and traffic sectors.

Catalysts

Provides software and hardware, data analytics/GIS services for the rail, traffic data, and transportation industries in the United Kingdom, Ireland, rest of Europe, Europe, North America, and internationally.

• Tracsis is aiming to increase recurring software revenues, particularly in its Rail Technology business, and transactional revenue growth, which are expected to drive future revenue growth.
  
• The company is actively pursuing international diversification, especially in North America, which could expand its market reach and contribute to long-term revenue expansion.
  
• Tracsis is engaged in strategic acquisitions, such as iBLOCKS and RailComm, to enter new markets and enhance technological offerings, potentially boosting earnings through revenue synergies.
  
• The company is investing in R&D and developing next-generation technology platforms, which could lead to margin improvement by scaling operations and enhancing productivity in product deployments.
  
• A £3 million share buyback reflects confidence in future growth trajectory, which might enhance earnings per share and provide a benefit to shareholders.

Tracsis Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Tracsis's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 8.2% in 3 years time.
• Analysts expect earnings to reach £7.6 million (and earnings per share of £0.15) by about June 2029, up from £981.0 thousand today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £6.7 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 31.7x on those 2029 earnings, down from 92.6x today. This future PE is greater than the current PE for the GB Software industry at 19.8x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.12%, as per the Simply Wall St company report.

Risks

• Funding shortfalls in the UK's Control Period 7 for the Rail Industry have led to a significant drop in hardware volumes for Tracsis’ remote condition monitoring business, impacting revenue and EBITDA in the short term.
  
• The impact of a cyberattack on a large customer caused a temporary disruption in revenue streams, highlighting potential vulnerabilities in earnings from external technological risks.
  
• Inflationary pressures have negatively affected margins within the Traffic Data and Events business, where increased costs could not be fully recovered through pricing, impacting net margins.
  
• Extended procurement timelines, due to uncertainty around the UK government's rail reforms, have delayed contract awards, thereby influencing the predictability and timing of future revenue growth and cash flow.
  
• Challenges in the North American market, such as slower-than-expected contract conversions and macroeconomic uncertainties, may pose risks to revenue growth and market expansion goals outside the UK.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £6.18 for Tracsis based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £7.01, and the most bearish reporting a price target of just £5.5.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be £91.9 million, earnings will come to £7.6 million, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 9.1%.
• Given the current share price of £3.05, the analyst price target of £6.18 is 50.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.